Capitalism

A free course on Capitalism from Hillsdale College

What is it?

It is not rule by capitalists. It isn’t the free market, although free markets are an important part of it.

Its an economic system characterized by four components:

• Private property rights

• Freedom of Action, Exchange and Contract

• A medium of exchange, sound money

• The basic rules and institutions that protect and foster these.

Private Property

The fundamental principle of the capitalist system including ownership of the means of production. This includes the right to one’s own person and efforts (labor)

Rights has a particular meaning in this context. It refers to rights inherent in man’s nature. These are the rights identified by the 17^th century philosopher, John Locke in his two treatises on government. They are the inalienable rights of America’s Declaration of Independence. It was commonly understood that ownership of private property is a necessary means for pursuing human flourishing.

Owning nothing is the status of the slave.

State Capitalism is just another name for government control or socialism.

The essence of capitalism is that its an economy directed by individual citizens to exercise control over their own private property and use it in production, trade and free enterprise. This includes cases where individuals pool their property together to form corporations, partnerships, other kinds of firms and organizations. This remains private property owned by individuals.

Individuals are free to control and use their property as they see fit, so long as they don’t violate the equal rights of others. This includes freedom to transfer rights of personal property in mutually agreed upon exchange. We often call this the “Free Market”

The term “Free Market” can be misleading. It’s not “THE Market”. It isn’t the market that is free, it’s people who are free to make their own decisions and exchanges, not hampered or commanded by others, such as government officials. Under capitalism, trades must be voluntary for the parties involved. This is why capitalism is able to create mutual gain and prosperity while alternative systems do not.

Freedom of Action, Exchange and Contract means:

• The right to use one’s property as one sees fit
• The right to accept or reject any proposed exchange
• The right to propose exchanges with others
• The right and ability to enforce the exchange

Sound Money

Money facilitates trade

Determines value

Allows capital accounting and the very notion of capital

Money and money prices allow us to evaluate different courses of action and to choose the one more likely to be desired by others and beneficial to ourselves. Barter isn’t capitalism and cannot sustain a complex economy with many specializes goods and services that would be impossible to barter.

Basic Rules and Institutions to Protect the System

These include both formal and informal rules.

Formal rules are those written and enforced by government. Laws that protect private property and voluntary contracts. And limit interference by government officials to interfere with production.

Informal rules are those followed by the people themselves. Things such as customs, habits, practices, ethics, and a general attitude towards each other’s rights. These are the cultural bedrock of capitalism. A market economy can only be observed if the people support it.

Crony Capitalism

Crony capitalism is an economic system in which business success depends more on close relationships between businessmen and government officials than on free-market competition. It is often characterized by favoritism in the allocation of government resources (such as contracts, licenses, subsidies, tax breaks, or regulatory exemptions) to politically connected companies or individuals.Key features of crony capitalism:

• Collusion between business and government: Politicians or bureaucrats grant special privileges to certain companies or individuals in exchange for political support, campaign donations, bribes, or personal gain.
• Distortion of markets: Instead of succeeding through innovation, efficiency, or consumer demand, companies gain advantages through political connections.
• Barriers to entry: Well-connected firms can use government power to block competitors (e.g., through restrictive regulations or monopolistic licenses).
• Corruption and rent-seeking: Resources are directed toward lobbying and influence-peddling rather than productive investment.

Examples:

• A construction company owned by a politician’s friend wins most government infrastructure contracts, even if their bids are higher or quality lower.
• Banks that are “too big to fail” or politically connected get bailouts during crises while smaller competitors collapse.
• Regulatory agencies staffed by former industry executives who then favor their old employers (known as the “revolving door”).

How it differs from free-market capitalism:In true free-market (or laissez-faire) capitalism, success comes from serving customers better or more efficiently than competitors. In crony capitalism, success comes from serving politicians or bureaucrats.Common phrases associated with it:

• “It’s not what you know, it’s who you know.”
• “The game is rigged.”
• “Corporate welfare” or “socialism for the rich, capitalism for the poor.”

Critics (from both the left and the right) argue that crony capitalism undermines fairness, breeds corruption, slows economic growth, and erodes public trust in both markets and government. Many libertarians and free-market advocates are among its strongest critics, even though the term is sometimes wrongly used to attack capitalism itself.